Stock Quotes in this Article: BWS, CONN, CYBX, PVH, TFM

WINDERMERE, Fla. (Stockpickr) -- Short-sellers hate being caught short a stock that reports a blowout quarter. When this happens, we often see a tradable short-squeeze develop as the bears rush to cover their positions to avoid big losses. Even the best short-sellers know that it’s never a great idea to stay short once a bullish earnings report sparks a big short-covering rally.

This is why I scan the market for heavily shorted stocks that are about to report earnings. You only need to find a few of these stocks in a year to help enhance your portfolio returns -- the gains become so outsized in such a short timeframe that your profits add up quickly.

That said, let’s not forget that stocks are heavily shorted for a reason, so you have to use trading discipline and sound money management when playing earnings short-squeeze candidates. It’s important that you don’t go betting the farm on these plays and that you manage your risk accordingly. Sometimes the best play is to wait for the stock to break out following the report before you jump in to profit off a short squeeze. This way, you’re letting the trend emerge after the market has digested all of the news.

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Of course, sometimes the stock is going to be in such high demand that you risk missing a lot of the move. That’s why it can be worth betting prior to the report -- but only if you have a very strong conviction that the stock is going to rip higher, and its acting technically very bullish. Remember, even when you have that conviction and you have done your due diligence, the stock can still get hammered if the street doesn’t like the numbers or guidance.

If you do decide to bet ahead of a quarter, then you might want to use options to limit your capital exposure. Heavily-shorted stocks are usually the names that make the biggest post-earnings moves and have the most volatility. I personally prefer to wait until all the earnings-related news is out, and then jump in and trade the prevailing trend on a heavily-shorted stock that’s reporting its numbers.

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With that in mind, here’s a look at several stocks that could experience big short squeezes when they report earnings this week.
 

 

PVH

My first earnings short-squeeze play today is apparel player PVH (PVH), which is set to report results on Monday market the market close. PVH operates as an apparel company in the U.S., Canada, Europe, and internationally. Wall Street analysts, on average, expect PVH to report revenue of $1.34 billion on earnings of $1.20 per share.

PVH has been on fire during 2012, with shares up over 25%. Shares are currently trading just five points off its 52-week high of $93.06 a share.

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The current short interest as a percentage of the float for PVH sits at 1.6%. That means that out of the 66.69 million shares in the tradable float, 1.11 million shares are sold short by the bears. This isn’t a huge short interest, but it’s more than enough to spark a decent short covering rally if PVH can deliver the news the bulls are looking for.

From a technical perspective, PVH is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has found buying interest during the last four months whenever it’s pulled back to around $73 to $72 a share. Shares of PVH recently triggered a breakout once it took out some near-term overhead resistance at $82.50 to $84.69 a share. Following that breakout, shares of PVH have trended up towards its current price of $88.60. That move has pushed PVH within range of triggering another major breakout trade.

If you’re bullish on PVH, then I would wait until after they report earnings and look for long-biased trades if this stock can manage to break out above some near-term overhead resistance at $89.31 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 996,583 shares. If we get that action, then PVH will have a great chance of re-testing and possibly taking out its 52-week high of $93.06 a share. If that $93.06 level gets taken out, then we could see PVH hit $100 after earnings.

I would simply avoid PVH or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some near-term support at $86 a share with heavy volume. If we get that move, then PVH could easily trade back down towards its 50-day moving average of $80.69 a share, or even its 200-day moving average of $79.78 a share.

Brown Shoe

Another earnings short-squeeze trade idea is footwear retail player Brown Shoe (BWS), which is set to release its numbers on Tuesday before the market open. This company’s activities include the operation of retail shoe stores and e-commerce Websites, as well as the sourcing and marketing of footwear for women and men. Wall Street analysts, on average, expect Brown Shoe Company to report revenues of $606.31 million on earnings of 3 cents per share.

Brown Shoe has been skyrocketing so far in 2012, with shares up around 70%. The stock hit a new 52-week high today of $15.31 ahead of its earnings report.

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The current short interest as a percentage of the float for Brown Shoe is pretty high at 11.8%. That means that out of the 40.38 million shares in the tradable float, 4.74 million shares are sold short by the bears. This is a decent short interest on a stock with a relatively low float. Any bullish news from Brown Shoe Company and this stock could experience a large short-squeeze post-earnings.

From a technical perspective, BWS is currently trading above both its 50-day moving and 200-day moving averages, which is bullish. This stock has been uptrending very strong for the past four months, with shares soaring from a low of $8.23 to its recent 52-week high of $15.31 a share. During that uptrend, shares of BWS have been consistently making higher lows and higher highs, which is bullish technical price action.

If you’re in the bull camp on BWS, then I would wait until after they report and look for long-biased trades if this stock manages to trigger a break out to a new 52-week high above $15.31 a share with heavy volume. Look for volume on that move that hits near or above its three-month average action of 531,581 shares. If we get that move, then BWS will have a great chance of re-testing or possibly taking out its next major overhead resistance levels at $17.38 to $18.79 a share post-earnings.

I would simply avoid BWS or look for short-biased trades if after earnings this stock fails to trigger that breakout, and then moves back below some near-term support at $14 to $13.40 a share with heavy volume. If we get that move, then BWS will setup to re-test or possibly take out its next major support levels at $12.89 to $12 a share post-earnings.

Conn's

Another potential earnings short-squeeze play is Conn's (CONN), which is set to release numbers on Tuesday before the market open. This company is a specialty retailer of durable consumer products, and it also provides consumer credit to support its customers’ purchases of the products that it offer. Wall Street analysts, on average, expect Conn's to report revenue of $204.55 million on earnings of 35 cents per share.

On Aug. 7, Conn's reported that second quarter revenue at stores open at least a year jumped 22% boosted by a spike in demand for furniture and mattresses. The company said revenue at stores open at least a year for furniture and mattresses jumped 58%, helped by a better product selection and an increase in promotional activities.

The current short interest as a percentage of the float for Conn's is extremely high at 34.3%. That means that out of the 24.10 million shares in the tradable float, 5.67 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 16.1%, or by about 787,000 shares. If the bears are caught leaning too hard into this quarter, then we could easily see a monster short-squeeze develop post-earnings.

From a technical perspective, CONN is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the past three months, with shares soaring from a low of $14.40 to a recent high of $22.95 a share. During that sharp move the upside, shares of CONN have consistently made higher lows and higher highs, which is bullish technical price action. This stock has even started to trigger a near-term breakout today with shares moving above some near-term overhead resistance at $22.26 to $22.41 a share.

If you’re bullish on CONN, then I would wait until after they report and look for long-biased trades if this stock can manage to break out to a new 52-week high above $22.95 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 360,062 shares. If we get that move, then look for CONN to possibly hit $30 a share post-earnings.

I would avoid CONN or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops below some near-term support at $21.04 to $20.76 a share with heavy volume. If we get that action, then CONN will setup to re-test and possibly take out its 50-day moving average of $17.96 a share.

Cyberonics

Another possible earnings short-squeeze play is medical equipment and supplies player Cyberonics (CYBX), which is set to release numbers on Tuesday before the market open. This company offers vagus nerve stimulation therapy, a neuromodulation therapy for the treatment of refractory epilepsy and treatment-resistant depression, and other device solutions for the management of epilepsy. Wall Street analysts, on average, expect Cyberonics to report revenue of $58.45 million on earnings of 36 cents per share.

This company has topped Wall Street estimates during the last four quarters. Over that timeframe, the average earnings surprise was a positive 15.73%. William Blair recently initiated coverage on Cyberonics with an outperform rating. This stock has been off to strong start in 2012, with shares up over 30% so far.

The current short interest as a percentage of the float for Cyberonics stands at 8.4%. That means that out of the 24.01 million shares in the tradable float, 2.22 million shares are sold short by the bears. This is a decent short interest on a stock with an extremely low float. Any bullish news out of Cyberonics that the bulls like could easily spark a large short-squeeze post-earnings.

From a technical perspective, CYBX is currently trading above its 200-day moving average and right below its 50-day moving average, which is neutral trendwise. During the last four months, shares of Cyberonics have been uptrending strong with shares trending higher from $36.25 to its recent high of $47.39 a share. During that uptrend, shares of CYBX have consistently made higher lows and higher highs, which is bullish technical price action. That move has pushed CYBX within range of triggering a near-term breakout trade.

If you’re in the bull camp on CYBX, then I would look for long-biased trades after earnings if this stock manages to trigger breakout trade above some near-term overhead resistance levels at $45.58 to $46.05 a share, and then above its 52-week high of $47.39 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 245,684 shares. If we get that move, then look for CYBX to trade north of $50 a share post-earnings.

I would simply avoid CYBX or look for short-biased trades after earnings the stock fails to trigger that breakout, and then moves back below some near-term support at $43.57 to $42.25 a share with high volume. If we get that action, then look for CYBX to re-test and possibly take out its next significant support levels at $40 to $41 a share, or possibly even its 200-day moving average of $37.80 a share.

Fresh Market

One more earnings short-squeeze play is specialty food retailer Fresh Market (TFM), which is set to release numbers on Wednesday before the market open. This company focuses on perishable product categories, including meat, seafood, produce, deli, bakery, floral, sushi and prepared foods. Wall Street analysts, on average, expect Fresh Market to report revenue of $307.99 on earnings of 27 cents per share.

This company has topped Wall Street estimates last quarter after falling short in the previous two quarters. During the first quarter, the company reported net income of 40 cents per share versus Wall Street estimates of 35 cents per share. In the fourth quarter of the last fiscal year, the company missed Wall Street estimates by one cent. In the first quarter, profit jumped 43% to $19.3 million from $13.5 million the year earlier. Revenue rose 22.8% to $324.8 million from $264.5 million.

The current short interest as a percentage of the float for Fresh Market stands at 8.3%. That means that out of the 40.62 million shares in the tradable float, 3.13 million are sold short by the bears. If Fresh Market can deliver the earnings news and numbers the bulls are looking for, then we could easily see a decent short-squeeze develop post-earnings.

From a technical perspective, TFM is currently trading above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending extremely strong for the past six months, with shares trending higher from a low of $43.37 to a recent high of $62.48 a share. During that uptrend, shares of TFM have consistently made higher lows and higher highs, which is bullish technical price action. That move has pushed TFM within range of triggering a near-term breakout trade post-earnings.

If you’re bullish on TFM, then I would wait until after they report earnings and look for long-biased trades if this stock triggers a breakout trade above some near-term overhead resistance at $62.48 a share (or above its daily high on Wednesday, whichever is greater) with high volume. Look for volume on that move that registers near or above its three-month average action of 920,636 shares. If we get that action, then look for TFM to hit $70 a share or higher post-earnings. Keep in mind that new high hit above $62.48 will mean that TFM has entered into all-time territory.

I would simply avoid TFM after earnings if it fails to trigger that breakout, and then moves back below some major near-term support at $57.36 to $56.47 a share with heavy volume. If we get that move, then TFM will have traded back below its 50-day moving average. We could possibly see TFM trade down towards $50 to $48 a share if those near-term support levels at taken out post-earnings.

To see more potential earnings short squeeze plays, check out the Earnings Short Squeeze Plays portfolio on Stockpickr.

-- Written by Roberto Pedone in Winderemere, Fla.

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At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.